Project Financing of W Asset with Reserve Based Lending (RBL) Method

Abstract

Abstract The global pandemic of the coronavirus outbreak in 2020 caused the world economy to shake and world energy demand to weaken, impacting oil prices to fall dramatically. In this situation, oil and gas companies need to adapt by streamlining costs. PT Mega Energi Tbk (PTME) is an upstream holding public company with several subsidiaries that manage oil and gas block assets in Indonesia. In 2018, PTME acquired oil-producing assets "W" and established the ME-W company. At that time, the oil price was 80 $ a barrel for purchase, but the oil price crisis in 2020 changed the plan. It was about PTME’s strategy for keeping W’s assets and sharing that pledge with the bank. In 2018, PTME secured financing from a bank to purchase W assets and launch ME-W. At that time, the cash flow of ME-W could service this debt, but as the oil price fell, simply maintaining business operations became impossible for the company. ME-W was forced to reduce operational expenses and delay the expansion plan, but as a result, the company's cash flow performance wasn't as strong when the loan arrangement was signed. If ME-W can't pay the installment of the principal and interest on the loan, PTME will lose its rights to ME-W. For this reason, the company must refinance to pay off the prior loan. PTME has another subsidiary, ME-B manages asset B, which sells gas and is not affected by the decline in the oil price. ME-B will submit for ME-W loan refinancing. Due to the high business risk in the oil and gas industry and ME-B doesn’t have assets whose more value than the previous loan, the company submitted a new loan scheme, Reserve-Based Lending (RBL). The RBL method can make the bank feel more secure because the determining loan amount uses the company's cash flow performance. The bank will do a redetermination every six months to review the company's performance. ME-B has an advantage in processing loan requests. ME-B only needs to provide forecast entitlement that reflects the gas sales agreement until the loan end date based on reserve tail calculation. The RBL system can help PTME to settle previous loans and preserve ME-W assets. This paper can provide information that the RBL method is commonly utilized by oil and gas companies and financial institutions overseas and about the possibility of financing oil and gas projects in Indonesia using the same method by local banks.